Philippines Central Bank on Hold But Inflation Rising

The Philippine central bank is unlikely to raise rates at its meeting Thursday. But a recent pickup in consumer prices and money supply growth is starting to cause some worries.

All 11 economists polled by the Wall Street Journal expect the Bangko Sentral ng Pilipinas to keep overnight rates at record low 3.5% for borrowing and 5.5% for lending.

But four economists think rising price pressures mean the central bank will raise banks’ reserve requirements by another percentage point to cool domestic liquidity growth. A reserve requirement is the minimum amount of deposits that commercial banks must place in the central bank’s vaults.

Inflation remains within the bank’s target range of 3%-5%, but its trajectory is worrying due to rising food and oil prices as well as transport costs. The uptick has narrowed the scope for the central bank to hold policy rates at record lows.

Many economists expect the central bank will start raising rates in the second half of this year to guide inflation to a lower target range of 2%-4% in 2015.

The central bank this year has raised banks’ reserve requirements by a total two percentage points, siphoning around $2.7 billion in liquidity out of the monetary system.

Central bank deputy governor, Diwa Guinigundo, expects the increases in banks’ reserve requirement, among other factors, to slow money supply growth to around 18% year-on-year by the middle of 2014, after increasing at monthly rates of over 30% since July last year.

Michael Wan, an economist with Credit Suisse, expects the central bank to raise banks’ reserve requirements to 21% from 20% at Thursday’s meeting and to start raising interest rates in September.

Trinh Nguyen, an economist at HSBC, also expects a reserve ratio increase on Thursday.

She expects the central bank to raise rates in July to 3.75%. After Thursday’s meeting, the central bank will hold its next policy meeting on July 31.

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